http://www.twolouiesmagazine.com/pdfs/1999/2L_2_1999.pdf
RECORDING CONTRACT ADVANCES
By Bart Day, Attorney
One of the most frequently discussed as
pects of recording contracts is the is
sue of advances. Generally speaking,
advances are designed to cover recording costs, and
also (at least in major label situations) to provide a
certain amount of money to cover some of the band’s
miscellaneous other expenses. A separate advance is
paid for each album recorded by the band for the
record company.
Recording contract advances are often megahyped
in press reports. For example, it is not unusual
for a record deal for a new band to be hyped as
a “million dollar deal,” whereas in fact that “million
dollars,” is to cover, for example, the recording budgets
for four albums at $250,000 per album, all of
which will be recoupable from the band’s future royalties.
A relatively small portion of that money will
go into the band’s pockets as cash advances, and even
that portion will be further reduced by deductions
for management commissions, taxes, etc., with the
rest often spent soon thereafter for living expenses,
new equipment, etc. And, like advances for recording
costs, any such cash advances will be entirely recoupable
from the band’s future royalties. Also, the
“million dollars” assumes that the label will exercise
its options for all four albums, whereas in fact the
label might elect to drop the band before all four albums
are completed.
“RECORDING BUDGETS” AND “RECORDING
FUNDS”
There are two different ways in which recording
contracts can deal with the issue of advances: (1)
By providing for “recording budgets”; or (2) By providing
for a “recording fund” for each album. In other
words, the typical recording contract will be structured
either on a “recording budget” basis, or alternatively,
on a “recording fund” basis.
1. “Recording Budgets.” In the case of recording
contracts based on “recording budgets,” the record pays
the recording costs directly to third parties, such as
recording studios, based on recording budgets to be
approved by the record company. The record company
holds on to the money until the costs are incurred,
and then makes payment for those costs directly
to those third parties (such as recording studios).
The record company may also advance the band,
separately, a certain specified amount of money for
the band’s anticipated living expenses during the recording
project, and sometimes for other expenses
as well.
2. The “Recording Fund” Structure. In the case
of a “recording fund,” on the other hand, the record
company pays a certain specified amount of money
(the “recording fund”) directly to the band, which the
band then uses to pay for recording costs, etc. If anything
is left over, the band will pocket the balance.
Theoretically this is designed, among other reasons,
to give the band an incentive to record the band’s albums
as cost effectively as possible, since the band
gets to keep whatever money it does not end up
spending on recording costs. However, as a practical
matter, however, even bands paid on this “recording
fund” basis frequently run over-budget.
Also, even in the case of this “recording fund”
structure, there will often still be a recording budget
drawn up so that the record company will have some
assurance that the band will not be trying to record
the album too cheaply or too expensively. Under
many contracts for new bands, the band will not be
entitled to start the recording of an album until the
record company approves the budget.
Typically, part of the recording fund will be paid
at the beginning of the recording project (often onehalf),
with the balance to be paid upon the band’s
delivery of the masters to the record company.
ADVANCES ARE NOT GIFTS
Advances are, in effect, merely loans to the band,
which will be deducted by the record company from
the band’s record sales royalties, but only from those
royalties.
So if the recording costs for an album (and related
cash advances to the band) are $200,000, and
the album generates $300,000 in royalties payable to
the band, the record company will reimburse itself
(recoup) from royalties the first $200,000 (in order
to reimburse itself for the $200,000 advanced), then
pay the band the remaining $100,000.
The record company’s right to reimbursement
is carried forward from album to album. Let’s take,
for example, an extreme (and admittedly unrealistic)
situation, exaggerated to make a point. Let’s say that
a band receives $200,000 for the first album, and (to
make it very simple), let’s also say the record sells zero
units and therefore generates absolutely no royalties.
Then the band records a second album for $250,000,
and that record also generates no royalties. So, when
starting the third album (assuming that the band has
not already been dropped from the label at that point,
which obviously is a very questionable assumption),
the band is going into the third album already
$450,000 in the hole. (In reality, the band in that scenario
would likely be even further in the hole, due to
record company’s recoupable advances to make music
videos, etc.)
If the band then gets an advance for the third
album of another $250,000, then the band is already
$700,000 in the hole when the third album is released.
As a result, the band will see absolutely no record royalties
from the third album until the total royalties
from album sales exceed the amount of $700,000. In
short, the record company has the right to recoup
from an album’s royalties not only the advance for
that album, but also any past advances for earlier albums
which have not yet been recouped.
There is also the “rolling accounting” problem
to consider. Often once royalties are starting to be
earned on a prior record, the recording company is
just starting to pay the costs of the next record, and
deducting the new costs from the royalties about to
be paid.
If the band’s total royalties ultimately end up
being less than the total advance(s) paid to the band,
the record company will, under the terms of the usual
recording contract, have to “eat” the shortfall, since
the record company will only be entitled to be repaid
from the band’s record sales royalties. The band members
will not be personally responsible for repaying
the advance, hence such advances are generally referred
to in recording contract legalese as “recoupable
but non-returnable advances.” Any band should
be sure that its recording contract is worded this way.
“CROSS-COLLATERALIZATION”
Incidentally, and this is extremely important, any
band should be absolutely sure, before signing a recording
contract, that the contract allows the record
company to recoup advances from only the band’s
record sales royalties, and not also from the band’s
publishing royalties from record sales (i.e.,
“mechanicals”). In recording contract parlance, the
record company should be contractually barred from
“cross collateralizing” against mechanicals.
MINIMUMS AND MAXIMUMS
Recording contracts usually specify that a certain
dollar-amount of advance will be paid separately
for each album under the contract, and will state the
minimum and maximum amounts for each such album
advance.
The structure for these minimums and maximums
is usually as follows: The contract will specify
a certain set amount for the first album’s advance.
For albums after the first album, the contract will
specify (for each album) a minimum dollar-amount
advance (called “the floor”), but will also provide in
effect that if the album sells well, the advance for the
next album will be computed at 60% to 70% (typically,
two-thirds) of the royalties earned to date by
the band from the prior album (or sometimes, the
average royalties earned from the prior two albums),
but only up to a certain specified maximum amount
(called the “ceiling”).
Typically, these minimum and maximums will
increase from album to album. For example, the
minimum amount for the second album might be
$200,000 with the maximum at $300,000, whereas for
the third album the minimum might be $250,000, and
the maximum at $350,000.
CONCLUSION
Given all of these various factors, it’s easy to see
why seemingly successful bands sometimes receive
much more modest levels of income than one would
otherwise expect. These various factors also illustrate
why it is so important for a band to structure its record
deal in the most favorable way possible.
Editor’s Note: Bart Day is a Portland-based entertainment
attorney in private practice. He is also the
co-owner of ALLMEDIA, Ltd., a company with offices
in Portland and Los Angeles. ALLMEDIA specializes in
administering the licensing of music for film, television,
commercials, and computer games.
Bart is also a co-author of the new edition of
The Musician’s Business and Legal Guide, a book
compiled by the Beverly Hills Bar Association and
published by Prentice-Hall Publishing (New York).
The reader is cautioned to seek the advice of the
reader’s own attorney concerning the applicability of
the general principles discussed in this column to the
reader’s own activities.
RECORDING CONTRACT ADVANCES
By Bart Day, Attorney
One of the most frequently discussed as
pects of recording contracts is the is
sue of advances. Generally speaking,
advances are designed to cover recording costs, and
also (at least in major label situations) to provide a
certain amount of money to cover some of the band’s
miscellaneous other expenses. A separate advance is
paid for each album recorded by the band for the
record company.
Recording contract advances are often megahyped
in press reports. For example, it is not unusual
for a record deal for a new band to be hyped as
a “million dollar deal,” whereas in fact that “million
dollars,” is to cover, for example, the recording budgets
for four albums at $250,000 per album, all of
which will be recoupable from the band’s future royalties.
A relatively small portion of that money will
go into the band’s pockets as cash advances, and even
that portion will be further reduced by deductions
for management commissions, taxes, etc., with the
rest often spent soon thereafter for living expenses,
new equipment, etc. And, like advances for recording
costs, any such cash advances will be entirely recoupable
from the band’s future royalties. Also, the
“million dollars” assumes that the label will exercise
its options for all four albums, whereas in fact the
label might elect to drop the band before all four albums
are completed.
“RECORDING BUDGETS” AND “RECORDING
FUNDS”
There are two different ways in which recording
contracts can deal with the issue of advances: (1)
By providing for “recording budgets”; or (2) By providing
for a “recording fund” for each album. In other
words, the typical recording contract will be structured
either on a “recording budget” basis, or alternatively,
on a “recording fund” basis.
1. “Recording Budgets.” In the case of recording
contracts based on “recording budgets,” the record pays
the recording costs directly to third parties, such as
recording studios, based on recording budgets to be
approved by the record company. The record company
holds on to the money until the costs are incurred,
and then makes payment for those costs directly
to those third parties (such as recording studios).
The record company may also advance the band,
separately, a certain specified amount of money for
the band’s anticipated living expenses during the recording
project, and sometimes for other expenses
as well.
2. The “Recording Fund” Structure. In the case
of a “recording fund,” on the other hand, the record
company pays a certain specified amount of money
(the “recording fund”) directly to the band, which the
band then uses to pay for recording costs, etc. If anything
is left over, the band will pocket the balance.
Theoretically this is designed, among other reasons,
to give the band an incentive to record the band’s albums
as cost effectively as possible, since the band
gets to keep whatever money it does not end up
spending on recording costs. However, as a practical
matter, however, even bands paid on this “recording
fund” basis frequently run over-budget.
Also, even in the case of this “recording fund”
structure, there will often still be a recording budget
drawn up so that the record company will have some
assurance that the band will not be trying to record
the album too cheaply or too expensively. Under
many contracts for new bands, the band will not be
entitled to start the recording of an album until the
record company approves the budget.
Typically, part of the recording fund will be paid
at the beginning of the recording project (often onehalf),
with the balance to be paid upon the band’s
delivery of the masters to the record company.
ADVANCES ARE NOT GIFTS
Advances are, in effect, merely loans to the band,
which will be deducted by the record company from
the band’s record sales royalties, but only from those
royalties.
So if the recording costs for an album (and related
cash advances to the band) are $200,000, and
the album generates $300,000 in royalties payable to
the band, the record company will reimburse itself
(recoup) from royalties the first $200,000 (in order
to reimburse itself for the $200,000 advanced), then
pay the band the remaining $100,000.
The record company’s right to reimbursement
is carried forward from album to album. Let’s take,
for example, an extreme (and admittedly unrealistic)
situation, exaggerated to make a point. Let’s say that
a band receives $200,000 for the first album, and (to
make it very simple), let’s also say the record sells zero
units and therefore generates absolutely no royalties.
Then the band records a second album for $250,000,
and that record also generates no royalties. So, when
starting the third album (assuming that the band has
not already been dropped from the label at that point,
which obviously is a very questionable assumption),
the band is going into the third album already
$450,000 in the hole. (In reality, the band in that scenario
would likely be even further in the hole, due to
record company’s recoupable advances to make music
videos, etc.)
If the band then gets an advance for the third
album of another $250,000, then the band is already
$700,000 in the hole when the third album is released.
As a result, the band will see absolutely no record royalties
from the third album until the total royalties
from album sales exceed the amount of $700,000. In
short, the record company has the right to recoup
from an album’s royalties not only the advance for
that album, but also any past advances for earlier albums
which have not yet been recouped.
There is also the “rolling accounting” problem
to consider. Often once royalties are starting to be
earned on a prior record, the recording company is
just starting to pay the costs of the next record, and
deducting the new costs from the royalties about to
be paid.
If the band’s total royalties ultimately end up
being less than the total advance(s) paid to the band,
the record company will, under the terms of the usual
recording contract, have to “eat” the shortfall, since
the record company will only be entitled to be repaid
from the band’s record sales royalties. The band members
will not be personally responsible for repaying
the advance, hence such advances are generally referred
to in recording contract legalese as “recoupable
but non-returnable advances.” Any band should
be sure that its recording contract is worded this way.
“CROSS-COLLATERALIZATION”
Incidentally, and this is extremely important, any
band should be absolutely sure, before signing a recording
contract, that the contract allows the record
company to recoup advances from only the band’s
record sales royalties, and not also from the band’s
publishing royalties from record sales (i.e.,
“mechanicals”). In recording contract parlance, the
record company should be contractually barred from
“cross collateralizing” against mechanicals.
MINIMUMS AND MAXIMUMS
Recording contracts usually specify that a certain
dollar-amount of advance will be paid separately
for each album under the contract, and will state the
minimum and maximum amounts for each such album
advance.
The structure for these minimums and maximums
is usually as follows: The contract will specify
a certain set amount for the first album’s advance.
For albums after the first album, the contract will
specify (for each album) a minimum dollar-amount
advance (called “the floor”), but will also provide in
effect that if the album sells well, the advance for the
next album will be computed at 60% to 70% (typically,
two-thirds) of the royalties earned to date by
the band from the prior album (or sometimes, the
average royalties earned from the prior two albums),
but only up to a certain specified maximum amount
(called the “ceiling”).
Typically, these minimum and maximums will
increase from album to album. For example, the
minimum amount for the second album might be
$200,000 with the maximum at $300,000, whereas for
the third album the minimum might be $250,000, and
the maximum at $350,000.
CONCLUSION
Given all of these various factors, it’s easy to see
why seemingly successful bands sometimes receive
much more modest levels of income than one would
otherwise expect. These various factors also illustrate
why it is so important for a band to structure its record
deal in the most favorable way possible.
Editor’s Note: Bart Day is a Portland-based entertainment
attorney in private practice. He is also the
co-owner of ALLMEDIA, Ltd., a company with offices
in Portland and Los Angeles. ALLMEDIA specializes in
administering the licensing of music for film, television,
commercials, and computer games.
Bart is also a co-author of the new edition of
The Musician’s Business and Legal Guide, a book
compiled by the Beverly Hills Bar Association and
published by Prentice-Hall Publishing (New York).
The reader is cautioned to seek the advice of the
reader’s own attorney concerning the applicability of
the general principles discussed in this column to the
reader’s own activities.